Babcock, Wolseley lead FTSE 100 bounce after bullish updates

LONDON, Oct 2 (Reuters) - Britain's top share index crept higher by midday on Tuesday as bullish updates from Babcock, Wolseley and International Airlines helped to outpace weakness in the banking sector.

By 1049 GMT, the FTSE 100

rose 15.47 points, or 0.3 percent, at 5,835.92, helped by expectations of an upbeat start when Wall Street opens later in the session.

The FTSE has fallen from its recent highs of around 5,914, which it hit after global central banks acted to stimulate the economy, as investors await the next development out of Spain.

European officials said the debt-laden euro zone country is ready to request a euro zone bailout for its public finances as early as next weekend but Germany has signalled that it should hold off.

"Germany remains the dissenting voice. Spain will have to request a bailout at some point and that has largely been built into equity prices. What is more important now is the growth outlook," Ian Williams, equity strategist at Peel Hunt, said.

"You could argue at the start of the year that on valuation grounds equities were cheap, but now they have rerated ... and with earnings yet to pick up, that argument is now looking stretched," he said.

Williams says September IBES earnings revisions updates showed a fifth straight month of net downgrades, while earnings expectations for 2013 have yet to be significantly altered.

That leaves valuation of the FTSE 100, which trades on a forward price-to-earnings ratio of 11.3 times - below historic levels but near post-credit crisis highs - looking full.

There were some upbeat corporate updates in the UK, ahead of the start of the next quarterly earnings season in the United States and Europe, where investors will be looking for signs that stimulus provided by global central banks is beginning to feed through to the broader economy.

British defence services group Babcock International

was the top rising London blue-chip, up 3.7 percent after the firm delivered a strong first-half performance.

"Babcock shares have rallied above the 900 pence mark and hit highs of 944 pence, but after drifting recently, the results this morning seem to have lit a fire under the share price," Rik Thakrar, senior dealer at Spread Co, said.

British plumbing and building supplies group Wolseley

added 2.6 percent after it posted a 10 percent rise in full-year profit and said it proposed a special dividend of 350 million pounds.

"These are solid FY trading results from Wolseley, with a positive surprise from a special dividend." Panmure Gordon said in a note.

Investors cheered International Airlines

, up 2.5 percent, after sources said the owner of British Airways will extend its global reach when Qatar Airways becomes the first Gulf carrier to join the oneworld alliance of airlines. BID TALK

"Whilst there's momentum in the story, it won't go away. It would be very foolish to bet against a bid story," says a London-based trader.

United Utilities and pumpmaker Weir Group ,

which have both been subject to bid speculation in recent weeks, were each up 0.8 and 1.5 percent respectively.

Banking shares dominated the fallers after UBS cut their rating to "neutral" from "buy", citing concerns the sector may need to raise new capital at some point.

Part-nationalised lenders Royal Bank of Scotland

and Lloyds

both fell by around 2.5 percent.

"The UK banks have not heeded exhortations to raise external equity in our view as they simply do not need it. However, we see a risk that the market will focus the absolute equity level requirement as leading to a risk of new equity issuance, to the detriment of current equity value," UBS wrote in a note.

Credit Suisse kept a small "underweight" position in lenders in Europe, saying banks should be around 30 percent cheaper (price-to-book (PB) of 0.7 times) to compensate for the high risks (taxation, disintermediation, further regulation, change to bankruptcy laws).

Lloyds, RBS, and Barclays currently trade on a PB of between 0.2 and 0.6 times, according to Thomson Reuters Starmine data.